Pandora’s Internet radio bill hits a wall of opposition in Congress

One rep. calls the Internet Radio Fairness Act a "Paycheck Reduction Act."

Pandora CEO Joe Kennedy told Congress today, in no uncertain terms, that his business is in danger from high copyright royalty rates. But his plea fell on unsympathetic ears.

At a hearing before the House Judiciary Committee, key representatives were not only unmoved by Pandora, they were more interested in raising the royalties paid by terrestrial radio to musicians (radio currently doesn't pay royalties at all.)

Pandora, by contrast, pays about half its revenue in copyright royalties. Today, Kennedy compared those fees to satellite radio, which pays about 7.5 percent of its revenue, and cable radio, which pays 15 percent.

"The rates today in Internet radio prevent anyone from entering the market, or for those there, making any profit in the market," said Kennedy.

One of the bill's sponsors, Rep. Jason Chaffetz (R-Utah), told his colleagues that the landscape of Internet radio was littered with failed business ventures. "MTV, Rolling Stone, Microsoft, and AOL all tried to get into this business and can't get it to work." A rate change would let the industry flourish, he said. "Internet radio should be thriving beyond Pandora."

Many of the Internet radio options that do exist are essentially subsidizing those operations with their other revenue streams. "They use music as loss leaders," explained David Pakman, a venture capitalist who spoke in support of Pandora's bill, called the Internet Radio Fairness Act. He said from his point of view, Internet radio businesses are basically "uninvestable" given the current rate structure.

An opposition more interested in raising rates than lowering them

The idea that the Internet Radio Fairness Act represents any kind of "fairness" was roundly mocked—not just by Jimmy Jam, the chair emeritus of The Recording Academy who spoke representing musicians, but by more than one Congressman whose support would be needed to pass the bill.

"This bill is ironically named," said Jam. "It's hardly fair to ask the very people who enable Pandora's business to work to accept below-market payments."

Jam said Pandora's proposal would lower "already small" payments to artists by as much as 85 percent. His attacks on the bill were picked up by Rep. John Conyers (D-Michigan) and Rep. Melvin Watt (D-North Carolina), among others.

"A more appropriate title might be the Paycheck Reduction Act," said Conyers, who referenced the fact that more than 100 prominent musicians recently made public their opposition to the bill and placed an ad in Billboard magazine to make sure they made their point.

Watt said that the "longstanding inequity" in rates that Pandora was complaining about ignored the fact that "an even longer-standing inequity exists, in that US copyright law fails to recognize a performance right for vocal artists and musicians when their music is played over FM and AM radio."

Watt—the ranking Democrat on the committee—added that if a bill to lower rates for internet radio didn't also raise rates for terrestrial radio, he wasn't going to vote for it. "We have to be dealing with the entire package here, otherwise I personally don't have that much interest in it," said Watt at the end of the hearing.

Rep. Jerrold Nadler, (D-NY) also said he wouldn't support Pandora's bill, reiterating his stance that the really important thing is to get musicians paid for radio play. "They're the only people in the US not paid for their labor, period," he said. "I do not think this bill should be enacted except as part of a global solution."

Michael J. Huppe, the president of SoundExchange, said that whatever financial woes Pandora is going through are its own doing. "Pandora made a conscious business decision to focus on growing their user base, their audience, and their brand—growing the hype," Huppe told the committee. "They've done a good job of it, but the fact is... they've done things other than focus on revenue."

SoundExchange is the group in charge of dividing up digital radio revenue between various interested parties in the music industry. Later in the hearing, Chaffetz demanded to know what percentage of SoundExchange's revenue comes from Pandora. Huppe said that between 60 and 70 percent of SoundExchange's Internet revenue comes from Pandora.

Pandora CEO Kennedy disputed the notion that his company's lack of profitability was due to anything other than the royalty rates. "Pandora monetizes Internet radio better than anyone," he said. "The issue is that on 7 percent of [national] radio listening we pay a quarter-billion dollars."

Overall, to say Pandora's battle appears to be an uphill one would be a serious understatement. Its main ally is the terrestrial radio industry, which has become a "bad guy" to many in Congress. And the list of opponents is growing to include not just the entertainment industry but also unions and interest groups, both liberal and conservative. The SoundExchange president noted that the AFL-CIO, the NAACP, Americans for Tax Reform, and the American Conservative Union all opposed the bill. "That kind of outcry is a clear sign to congress this bill would be bad policy and would make bad law," said Huppe.

In the meantime, the Internet radio industry—which essentially consists of just one large player—will continue to be a losing bet.